Introduction    

Zara  is  a  fashion  retailer  established  in  1975  by  the  Spanish  group  Inditex  founded  by   Amancio  Ortega  Gaona.  Inditex  runs  over  more  than  5400  stores  worldwide  and  owns   brands   other   than   Zara   such   as   Massimo   Dutti,   Breshka,   Oysho,   Pull   and   Bear   and   Stradivarius.   Inditex   headquarters   are   located   close   to   La   Coruña   in   northwestern   of   Spain.   The   old   shipbuilding   town   of   La   Coruña   seems   an   unlikely   home   to   a   tech-­‐charged   innovator   in   the   fashion   industry.   But   that’s   where   the   Inditex   Corporation   built   its   headquarter  called  “The  Cube”.    

Zara’s  Business  Model  and  Its  Success  Factors  
Zara  is  the  most  profitable  (75%  of  Inditex  total  profit)  brand  of  Inditex  with  2,044.7   million  euros  in  2000.  Zara  has  developed  a  business  model  based  on  following  criteria:   1. 2. 3. 4. 5. Short  lead-­‐time   Scarce  supply     Large  varieties  of  style  and  colors   Limited  Advertising  Cost   High  turnover  

The  brand  succeeds  to  make  moderate  prices  with  a  large  choice  of  new  clothes  every   time.   Zara’s   short   lead-­‐time   system   depends   on   continuous   exchange   of   information   throughout  every  part  of  Zara's  closed  loop  feedback  system  (Figure  1).  This  chain  goes   from   customers   to   store   managers,   then   to   market   specialists   and   designers,   then   to   production   staff,   from   buyers   to   subcontractors,   from   warehouse   managers   to   distributors,   and   so   on.   Unlike   other   retailers   Zara's   organization,   operational   procedures,   and   even   its   office   layouts   are   all   designed   to   make   information   transfer   easy.   Zara's   employs   200   designers   who   sit   in   the   center   of   production   center.   Zara   produces   about   11,000   styles   each   year-­‐   perhaps   five   times   as   many   as   competitors.   This   allows   Zara   to   supply   its   stores   with   new   styles   every   two   weeks.   The   store   specialists  work  in  the  same  room  as  designers  and  review  store  sales  and  speak  with   store  managers  to  get  their  feedback.      

  Zara   not   only   reduces   its   exposure   to   any   single   product   but   also   creates   artificial   scarcity.   Figure  1   Zara’s  production  center  consists  of  three  spacious  halls:  women's  clothing  lines.  Zara  has  a  policy  of   moving  unsold  items  after  two  or  three  weeks.  reduces  the  usual  costs  associated  with  running  out   of  any  particular  item  and  markdown  management.  making  the  overall  supply  chain  more  responsive.  compared  with  the   industry  average  of  17%  to  20%.   providing   feedback   to   the   design   teams.  In  fact.     The   stores   act   as   market   information   gathering   terminals.   such   hard   data   as   orders   and   sales   trends   and   such   soft   data   as   customer   reactions   and   the   "buzz"   around   a   new   style.   .  While  any  company  can  use  PDAs  to  communicate.  unsold  items  account  for  less  than  10%  of  stock.  which  try  to  excise  redundant  labor  to  cut  costs.  Although  Zara  may  not  be  able  to   meet   the   customers   demand   but   empty   racks   don't   drive   customers   to   other   stores   because  shoppers  always  have  new  things  to  choose  from.  Every   two   weeks   Zara   introduces   new  products  in  small  quantities.   sales.  Although   it  is  more  expensive  to  operate  three  channels.  men's   and  children's.   Zara   makes   a   point   of   running   three   parallel.   but   operationally   distinct.  PDA  computers  and  phone  calls  help  bringing  the  information   from   all   the   stores   to   La   Coruña   and   to   headquarters.   separate   design.   Zara   is   careful   about   the   way   it   deploys   the   IT   tools   to   facilitate   its   information  exchanges.  Zara's  fast  paced  organization   ensures  that  important  conversations  don't  fall  through  the  bureaucratic  delays.  Unlike  most  companies.  This  can  be  an  expensive  practice  for  a   typical  store.   the  risks  are  small.  the  information  flow  for  each  channel  is   fast.  but  since  Zara  stores  receive  small  shipments  and  carry  little  inventory.   and   procurement   and   production-­‐ planning  staffs  are  dedicated  to  each  clothing  line.  new  merchandise  displayed  in  limited  quantities  and  the  short  window   of   opportunity   for   purchasing   items   motivate   people   to   visit   Zara's   shops   more   frequently   than   they   might   other   stores   (17   times   annually   on   average   for   Zara.   product   families.  direct.   By   reducing   the   quantity   of   manufacture   style.   Accordingly.  A  store  may  receive  three  different   calls  from  headquarters  in  one  week  from  a  market  specialist  in  each  channel.     Furthermore.

 more  and  more  competitors  struggle  to  gain  market  share.   with   a   strategy   based  on  quality  and  frequent  changes  in  the  fabrics  and  styles.compared   to   4   for   other   stores).3%   of   its   sales   on   ads.   2.   far   less   than   the   3   to   4%   its   rivals  spend.  and  we  can   wonder  if  Zara  will  not  be  forced  to  go  towards  more  discount  prices  due  to  an   increase  in  competition.  No  other  competitor  such  as  H&M  has  managed  to  create  this  kind  of   situation.   4.     .   A   key   point   in   Zara’s   strategy   that   helps   the   brand   differentiate   itself   from   the   other   competitors   resides   in   their   high   turnover.  from  design  to  stores.   3.   According   to   what   we   know   from   their   current   logistics   situation.   and   will   therefore   choose   to   outsource  the  biggest  part  of  their  production.  it  would  be  difficult   to  gather  the  entire  workforce  needed  in  a  short  period  of  time. Buyer  Power:  It  lies  in  the  hands  of  customers  of  what  they  like  and  purchase.  The  internet  channel  is  oriented  towards  a  decrease  in   differentiation   between   suppliers.   there   are   not   many   fast   fashion   shops   like   Zara   around.   they   have   developed   a   large   network   in   their   supply   chain   mostly  in  Spain  and  Portugal.   as   these   brands   are   generally   cost-­‐oriented.   The   high   traffic   in   the   stores   circumvents   the   need   for   advertising:   Zara   devotes   only   0. Rivalry:   In   todays   Market. Threats  of  New  Entrant:  Profitability  and  Success  of  Zara  may  attract  potential   individual  with  investment  to  enter  the  market.  it  has  enabled  Zara  to   build  the  whole  process.   As   Zara   is   historically   a   European   brand.   1.  Though  still.  as  a  very  confined  one.  Supplier   Power:     Zara   or   any   other   fashion   retailer   would   have   low   supplier   power  due  to  the  reason  that  their  goal  is  to  attract  every  potential  consumer  to   buy  their  merchandises.  in  order  to  produce  large  batches  that   will   then   be   sent   to   the   shops.   However.  The  only  issue   might  be  about  the  evolution  of  the  Internet  distribution  channel.     Strategic  Threats  to  Zara   In  this  study  strategic  threat  analysis  to  Zara  has  been  done  using  Porter’s  five  forces   framework.  and  trying  to  outsource  as  few  quantities  as  they  can  in   order  to  respond  quickly  to  the  demand  of  its  customers  (only  30%  of  their  production   comes  from  Asia).   The   uniqueness   of   Zara   allows   the   brand   to   profit   from   its   customers   without   even   spending   on   advertisement   in   order   to   gain   market   share.  It  contributes   to  smaller  needs  in  terms  of  investment  to  become  a  big  player  on  a  market.   All   information   can   be   collected   much   more   easily.   It  appears  so  that  Zara’s  customers  are  loyal  to  the  brand  and  they  don’t  mind   the  scarcity  of  products.

 Zara  does  not  need  high  level  of  expenditures  on  advertising  to   please  its  customers  and  to  expand  its  market  share.  the   potential  competitor  needs  to  be  sure  about  its  future  projects  and  financial  results.   the   biggest   barrier  to  copy  Zara’s  approach  is  the  capital  needed  to  invest  in  such  a  system.   it   would   have   to   completely   redesign   its   supply   chain.     .  with   Asos.  it  will   be  harder  to  succeed  without  advertisement  considering  the  current  number  of  brands   that  have  been  developed  in  this  market.   Even   if   the   whole   process   seems   clear   in   the   eyes   of   other   competitors.com).  What  will  be  tough  if   some   brand   was   to   copy   this   approach   will   be   to   find   the   right   links   that   can   work   together  and  master  the  costs  of  such  a  channel.  for  a  new  entrant.   their   advertising   investments   reside   in   the   choice   of   locations   for   stores.  to  be  able  to  manage  such  expenses.   the   higher   visibility   the   brand   will   have.   why   not   trying   to   follow   Zara’s   business  model?  It  is  mostly  because  of  the  essence  of  the  brand.   Though   Zara   distinct   from   others   by   continuous   innovation   and   creative   design   (every   two   weeks)   of   most   up-­‐to-­‐date   fashion.  we  can  wonder  why  no  other  brand  has  tried  to  copy  their  current   approach.  and  it  would  be  very  costly  and  not  necessarily   efficient.   Another   point   that   represents   a   barrier   to   copy   Zara’s   approach   is   its   vertical   integration   in   the   whole   process.  Being   able   to   struggle   against   such   a   big   player   in   the   fashion   industry   requires   money   but   also   enough   knowledge   in   design.  However.   operations.5.   It  may  seem  strange  that  Zara  does  not  spend  money  on  advertising.  If  a  competitor  was  to   try   to   imitate   this   approach.   Internet   is   a   potential  threat  for  Zara  as  it  expands  the  size  of  the  market  (for  example.   procurement  and  production  systems. Threat  of  Substitute:  The  fashion  industry  is  unpredictable  to  project  the  next   big   trends.   If   we   consider   now   a   current   competitor   of   Zara.   The   better   the   location   is.   in   order   to   meet   customer’s   demand   and   build  a  strong  network.  But  on  the  other   side.  Consequently.   Being   able   to   build   the   entire   network   from   procurement  to  stores  by  linking  all  components  using  efficiently  the  information  flows   has  enabled  Zara  to  have  control  on  all  steps  of  the  supply  chain.   and   the   higher   the   reputation  of  the  brand  will  be.     Barriers  to  Copy   Studying   in   detail   the   current   situation   of   Zara   and   seeing   that   they   are   especially   successful   in   their   management   (their   financial   results   exceed   those   of   their   competitors  by  far).

  through   outsourcing   to   Asian   countries   such   as   China.  Though  the   cost   of   production   in   Spain   is   17-­‐20%   more   expensive   than   Asia.   it   is   very   exposed   to   a   pressure   from   the  suppliers:  if  a  supplier  decides  not  to  respond  to  the  demand  or  faces  issues  in  the   procurement.   with   50%   made   in   Zara   controlled   facilities   in   the   Galicia   region   of   Spain   near   headquarters.   sacrifice  the  benefits  of  proximity  for  low  labor  and  production  costs.   Zara’s   competitors.  the  lack  of  flexibility  in  changing   orders   based   on   current   trends   hinders   their   operational   efficiencies.  Zara  does  not  have  another  potential  way  to  be  served.  Therefore.   It   also   decreases   costs   of   holding   inventory.   and   of   having   very   short   lead   times.   and   H&M.   Zara   does   have   a   competitive  advantage  over  its  competitors  in  regards  to  operations.   However.   disadvantages   of   this   system   are   two-­‐fold.   high   turnover.   finding  new  resources  from  other  parts  of  the  world  should  be  a  point  to  consider  to  be   able   to   recreate   the   successful   process:   JIT   manufacturing.  it  would  need  to   build  a  strong  supply  chain  on  this  territory  to  be  as  efficient  as  in  Europe.   thereby   reducing  waste  and  minimizing  the  need  to  clear  unsold  inventories.   .   short   lead   times.  Though  there  is  a   cost  advantage  in  their  approach  in  regards  to  labor.     Zara   outsources  only  30%  of  its  production  outsourcing  from  Asia  and  Morocco.   Firstly.Outsourcing   Zara.   does   not   rely   on   Asian   outsourcing.   A  second  point  to  mention  concerns  the  potential  international  expansion.   Benetton.   unlike   its   competitors   such   as   Gap.     This   process   has   the   advantages   of   being   very   responsive   to   any   kind   of   changes   in   demand   from   the   customers.   70%   of   Zara’s   materials   are   manufactured   in   Europe.    Zara   postpones   dyeing   and   printing   designs   until   close   to   manufacture.   Inventory   costs   are   higher   for   competitors   because   orders   are   placed   for   a   whole   season   well   in   advance  and  then  held  in  distribution  facilities  until  periodic  shipment  to  stores.  If  Zara  was   to  decide  to  increase  its  market  share  on  the  US  market  for  example.  The  proximity  of   these  suppliers  gives  Zara  great  flexibility  in  adapting  their  product  lines  based  on  up   to   date   market   trends   and   consumer   behavior.  The  local  strategic   partnerships   that   Zara   maintains   with   manufacturers   in   Europe   allow   for   a   total   control  and  product  throughput  time  of  3-­‐4  weeks  from  conception  to  distribution.

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